Activity Based Costing

1. Activity Based Costing Acct 310 Professor Rick S. Hayes, Ph.D., CPA

2. MicroMash CPE Course Example

4. Make sure that costing done correctly, reduce costs • Direct labor and materials costs [prime costs]– easy to trace to product • Manufacturing overhead is indirect cost – hard to trace, control – estimate, calculate cost per unit

6. Traditional Unit Based Cost (UBC) Accounting

7. Standard costing is about assigning overhead costs based upon one predetermined rate based on volume • Easier, less accurate; Works best with one product; • Could be misleading

10. Standard costing – steps • Accumulate total overhead costs • Identify activity and total amount of activity that best applies overhead costs to the product (base), e.g. labor hours • Calculate application base rate(total overhead/ total amount of the activity) $20,000 total oh/ 1,000 labor hrs = $20 base rate per hour worked • Apply overhead rate - Multiply base rate by total base activity used for each product. A product that takes 2 hours at $20 base rate would be allocated $40 of overhead (2 x $20)

11. Standard Costing Method Total manufacturing overhead $10,000,000 Direct labor hours 500,000 10,000,000/50,000 = $20/labor hour application base rate $20 * 2 hours per product to mfg. = $40 overhead cost per unit Product A = manufacturing overhead cost per unit- $40 Product B = manufacturing overhead cost per unit- $40 Product A = total manufacturing cost /unit - $150 Product B = total manufacturing cost/unit - $110

12. Standard Costing Method Standards costing example total cost per unit • A B • Direct Materials $90 $50 • Direct Labor @ $10/hr $20 $20 • Manufacturing OH $40$40 • Total per unit cost $150 $110

19. The organization is viewed as a pool of activities. Many of these activities will cut across deparments with departments often participating in many different activities

20. ABC costing – steps • Re-categorize overhead costs into activity pools • Calculate total costs and total physical base for each activity • Calculate application base rate for each category (total overhead/ total physical base) • Calculate proportion of physical base for each category • Multiply rate by base for each product • Calculate total overhead cost for each product • Divide total cost for each product by total products manufactured = overhead cost per unit • Add overhead cost per unit to direct labor cost per unit and direct material cost per unit = total cost per unit

21. Activity Based Costing • Two stage allocation process • Assign costs to pools, then assign to products using cost drivers • I.e. Sell 50,000 units – Product A, 200,000 units – Product B = 250,000 units total • Both require two direct labor hours to complete = 500,000 direct labor-hours • Total manufacturing overhead = $10,000,000

22. ABC Costing

24. Product A - manufacturing overhead costs = $93.20 Product B - manufacturing overhead costs = $26.70

25. A B Direct Materials $90 $50 Direct Labor @ $10/hr $20 $20 Manufacturing OH $93.20 $26.70 Total per unit cost $203.20 $96.70

28. QUESTIONS?

31. ABC Hierarchical Production Model

32. Facility Support Activities not ABC